The firm, which is in takeover talks with an unnamed suitor, is experiencing a slowdown in its capital markets division which slumped to a loss of £10.5m, compared with a £16m profit a year ago.

The division is languishing as companies shy away from raising fresh funds from investors whose appetite for new risk is being hampered by the credit crunch.

"My personal view is that these conditions could continue until 2010 or even 2011. These are most difficult economic circumstances we have ever seen," said Smith, who is also chief executive of acquisition-hungry money broker Tullett Prebon.

The loss in the capital markets arm knocked group operating profits to £7.1m, down from £40.5m a year ago, even though its Hawkpoint advisory business and wealth management operations reported a rise in earnings. The fourth division - the securities arm which provides research on 300 large and small cap stocks in the UK - experienced a fall in profits but "performed well" in the light of market conditions.

Chief executive Joel Plasco has ambitions to expand in the credit crunch and win business from mid-sized companies. He described an opportunity to win broking clients dropped by ABN Amro, recently taken over by Royal Bank of Scotland, and Dresdner Kleinwort, which is being put up for sale by its owner Allianz.

Plasco said there were "significant numbers" of potential companies that it might be able to attract. The company is also hiring new staff and is more likely to pursue this route to expansion rather than embark on acquisitions.

Neither Smith nor Plasco would comment on the status of the talks with the suitor, believed to be Japanese house Nomura. The Tullett Prebon operation spun out of Collins Stewart is also in takeover talks with US rival GFI Group.

Collins Stewart's shares fell 2.5p to 100.75p this afternoon after it halved its interim dividend to 1.3p and appeared to indicate that the final dividend would be lower too. The "unusual level of uncertainty" over its earnings had caused the board to cut the payout to shareholders, the company said, although it insisted its cash position was strong at £60.3m.

Smith, who admitted that market conditions could get worse before they improved, said the focus would be on "conserving cash and cost control".